May 2, 2014

A conflict between state laws continues to stifle renewable
energy development in Illinois, a state with one of the most ambitious green
power mandates that's already among the nation's largest wind energy producers.

Illinois passed a measure in 2007 requiring investor-owned
utilities Commonwealth Edison and Ameren Illinois to gradually step up use of
renewable energy to 25 percent in 2025. Wind development flourished in the
state in subsequent years, driven partly by the law.

Today, Illinois ranks fourth nationally, with more than
3,500 megawatts of wind generation capacity from 46 different wind farms
dotting the northern half of the state, according to data from the American
Wind Energy Association.

But a subsequent bill meant to jump-start competition among
electricity suppliers has inadvertently pulled the plug on new development.

As a result, Illinois is falling behind on self-imposed
goals to supply an increasingly greater share of its energy with cleaner,
renewable generation, and tens of millions of dollars set aside for just for
that purpose sits untapped.

Renewable energy advocates in the state continue to lobby
for a solution. But whether it gets fixed before legislators break later this
spring remains to be seen.

Competition exposes law's flaws

The problem slowing Illinois renewable energy development is
complex and intersects with the most fundamental change to utility regulation
in the state over the past quarter-century -- electric deregulation.

The Illinois General Assembly passed a bill in 1997 to open
the state's retail electricity markets. While competition for industrial and
large commercial customers flourished starting in 2000, residential customers
remained tethered to incumbent utilities until the law was amended a decade
later and the Illinois Commerce Commission implemented some rule changes to
encourage alternative suppliers to enter the market.

The key fix that helped millions of utility customers to
shop for power suppliers was a measure that let cities, townships and counties
aggregate, or pool, their electricity purchases. Much like a large company can
extract better prices for office supplies, the law enabled municipalities to
leverage their buying power to extract lower prices.

It was effective. Since 2011, about 70 percent of Illinois'
4.4 million residential utility customers have cut ties with Ameren and ComEd
and entered into contracts with alternative power suppliers. Utilities continue
to bill the customers and deliver power through the same network of poles and
wires.

While the law enabled electric competition to work for
residential and small-business utility customers, the mass shift of customers
from ComEd and Ameren to alternative suppliers over the past three years has
exposed structural flaws in the renewable law.

First is the short-term nature of agreements between
alternative energy suppliers and cities under municipal aggregation and the
fact that Illinois law allows utilities and energy suppliers to comply with the
law by purchasing either renewable energy itself or cheaper renewable energy
certificates (RECs).

Alternative electricity suppliers such as Constellation
NewEnergy, an Exelon affiliate, and Integrys are subject to the renewable
standard. Under an arrangement they negotiated several years ago, the companies
have the option to self-supply up to half of their renewable commitment by
purchasing RECs.

For the rest of their requirement, the companies must make
compliance payments to the Illinois Power Agency, which can use the funds to
buy RECs or renewable energy.

"But the IPA doesn't know how much funding will be
there each year and can't make long-term commitments," said Mark Pruitt,
an Illinois energy consultant and former executive director of the state
agency.

In the end, he said, "there is really no mechanism to
guarantee a long-term stream of payments, renewable or otherwise, in
Illinois."

Also complicating the situation is the fact that renewable
energy funds collected from consumers served by utilities and alternative
energy suppliers are maintained in separate "buckets." And the power
agency can't spend funds from alternative suppliers unless it is simultaneously
acquiring renewable energy for customers who still buy energy at the default
rate from utilities.

Because the utilities have seen most of their customers turn
to competing suppliers, they have no need to procure additional renewable
energy because they have more than enough from a 2010 wind energy procurement.

That binds the hands of the power agency, which didn't
conduct a renewable energy procurement last year. In fact, the agency had to
curtail some of the wind energy procured on behalf of utilities in 2010.

"Seventy percent of the residential customer base has
left the utilities," said Anthony Star, the agency's executive director.
"That kind of blows a hole in the budget."

Unspent funds and flat growth

The result of everything is a growing pool of money for
renewable energy procurement that can't be spent and a renewable energy mandate
that isn't being met.

As of the end of last year, customers served by alternative
energy suppliers had paid $53 million into a fund for renewable energy
procurement -- money that remains untapped.

The cash-strapped Illinois government borrowed almost $7
million from the fund a few years ago. It quickly repaid the loan, but there is
growing concern among clean energy advocates that the Legislature could look to
"sweep" the account once again.

Meanwhile, Illinois is falling behind on meeting its
renewable energy targets. The statute requires utilities and alternative
suppliers to obtain 8 percent of their generation from renewable resources for
the year ending June 30. While there are no official data available, all
parties agree that the state is falling short of the mandate.

An analysis by the Environmental Policy and Law Center
published by the Chicago Tribune last year suggested 5 percent of
eligible Illinois electricity demand was being met with renewable resources --
well short of the 8 percent mandate for the 12-month compliance period that
ends on June 30.

"Clearly, by some level of magnitude, the RPS is not
being met," Star said.

While renewable energy funds go unspent, clean energy
development in Illinois has ground to a halt.

While 820 MW of new wind generation was added in 2012, the
numbers last year were zero wind and only a couple of megawatts of solar, said
Barry Matchett, co-legislative director and policy advocate for the
Environmental Law and Policy Center, a Chicago-based clean energy advocacy
group that's helping negotiate a fix for the renewable standard.

A big reason for that, Matchett and other renewable
advocates said, is the inability of the state to enter into long-term power
purchase contracts that provide financial certainty to developers.

"Right now, banks are not lending to energy projects
that are operating on a merchant basis," said Kevin Borgia, manager of
membership and public policy for Wind on the Wires, a wind energy advocacy
group.

Borgia said developers representing eight prospective wind
farms cumulatively worth 1,300 MW are currently holding county-level permits --
a sign that they are serious about moving forward with the projects. And more
than 1,000 MW of wind development saw local permits expire last year, with no
guarantee that they'll go through the process again.

Searching for a solution

There's little disagreement about the nature of the problems
with implementing the renewable energy law in Illinois, even given all of the
disparate interests of utilities, alternative energy suppliers, renewable
energy developers, consumer interests and legislators.

But general agreement about the nature of the problem
doesn't make it any easier to implement a solution.

The proposed fix wouldn't change what consumers pay.
Instead, it would solve the problem by allowing funds set aside for renewable
energy to flow between accounts depending on whether customers take energy
supply from a utility or an alternative supplier. That would guarantee the
Illinois Power Agency a certain minimum level of funds to enter into long-term
agreements with renewable developers.

A proposal to free up existing funds for clean energy
procurement has been agreed to in principle by major players. And bills filed
in 2013 that stalled in the Legislature could ultimately be revived.

While several interested parties reportedly reached an
agreement last fall on a solution, the General Assembly has yet to formally
take up the issue this spring. Among those that signed off on the bill were
Chicago-based Exelon Corp., according to a story in Crain's Chicago
Business.

In a statement, however, the company said that while it
supported the 2007 renewable standard and remains a proponent of clean energy,
it is premature for the company to comment on any proposed changes in the law.

One important player that did not sign off on the fix
negotiated by clean energy advocates is the Illinois Competitive Energy
Association, an association of alternative energy suppliers.

Kevin Wright, the group's executive director and a former
ICC chairman, said the proposal would increase costs for his members by
restricting their ability to self-procure renewable energy resources and
forcing them to write bigger checks to the Illinois Power Agency.

Specifically, the proposed solution would allow alternative
suppliers to self-supply one-fourth of their renewable requirement and buy the
rest through the power agency. Currently, they can meet half of the requirement
on their own and find it more cost-competitive to do so.

More recently, rumors of some type of comprehensive energy
legislation next year to address the competitiveness of Exelon's Illinois
nuclear fleet could further complicate discussions about a fix for the
renewable standard.

Matchett, however, remains optimistic that a measure will be
adopted before the current session ends at the end of May.

"The existing statute isn't getting it done," he
said. "But what's great is that it's easily remedied."